Friday, March 13, 2009

It's really hard to show the "speed" of stock movements without recording trading in action. I'm guessing that's why most sites don't talk about the speed of a movement very much. For those without trading software (it's a necessity for serious trading), you will have an even harder time getting a feel for the speed of whatever stock, future, whatever you're following. Yes, I used to constantly refresh the charts at Zecco and Sogo Trading when I had a small account size. It helps, but the lack of streaming updates detracts from your ability to feel things in action. And, it limits your ability to quickly enter an order.

Scott of Fear and Greed Trader used to talk about getting a feel for the markets--learning to ride the "waves," getting in and out as movements started and finished. I like to imagine that he was talking about what I am feeling during my trading sessions right now.

What do I mean by the words "velocity," "acceleration," and "speed?" I think of it in terms of physics (using calculus, you could probably write some pretty spiffy trading indicators). Velocity and speed are similar. Both basically tell you how fast you're going (velocity gives you direction too: for our purposes, positive or negative). Applied to trading, velocity would probably be something like +/- $.03 per second. Acceleration is how fast the velocity is changing. If the velocity is at a constant +/- $.03 per second then the acceleration will be zero (velocity/speed is unchanged). This is rarely the case in real life. Instead, the velocity may be something like -$.01 per second meaning the velocity is decreasing at one cent per second (i.e. +$.03/sec, then $.02/sec, then $.01/sec...). And, of course, the velocity and acceleration are in a constant state of flux--all of which depends on the entries and exits of many, many traders and the direction the vast majority feel to be profitable.

How does this all fit in with successful trading? Well, I suppose you don't really need to understand things in the form of exact numbers like I wrote out above. The examples are just to give you an idea of what I'm talking about (and quite possibly encourage someone to write an indicator!).

It can all be done without the above. Just look at the chart (it really needs to be streaming) of the security of your choice and watch the candlestick movements. If things are moving pretty fast and begin to slow down, speed is waning and there could be a possibility of a reversal (depending on the location in relation to resistance/support/etc) or consolidation (look for maintained price, uncrossed MA's).

How fast are people bidding up the price? How fast is it falling? If the price is slowing, that means one side is gaining power over the previously dominate side (either through a diminishing faith or a ambush in the opposite direction). The speed at which a stock progresses also tells you how the traders are reacting psychologically. Are they hurriedly picking up shares in fear of losing short profits? Perhaps, they are overreacting to good news, or bad.

Speed is something that feels better to absorb while it happens. A bar could be a dollar high, but did it get there in one quick burst, a violent battle, or over a stable ascent? You can't really tell just by looking at a bar chart. Just because it's a 5 minute chart and the bar is $1 high, doesn't mean its speed was a constant $1/5minutes. There's another whole story between the lines (i.e. candles).

5 comments:

"The speed at which a stock progresses also tells you how the traders are reacting psychologically. Are they hurriedly picking up shares in fear of losing short profits? Perhaps, they are overreacting to good news, or bad. "

atleast half of all trades on the big exchanges are program trades nowadays though. Hedge funds with computers. I see what you mean though for penny's.

well, I guess there is still a lot of psychology though. I really have no idea the real amount of program trading going on. I read that a couple years ago it was like 30-40% on the Naz and NYSE I'm a cynic so take that to really mean 60%+ lol

Mark, like you said the sentence still stands for illiquid and gutter stocks traded by retail and semi-pro traders. As for the bluer chip stocks traded by machine, the sentence could be modified to say "...reacting psychologically, and how the algorithms of the computer-based trading robots may be responding to the stock's price movement."

CP - Nice post. How would you factor volatility into this equation?

Thanks for the offer for the coaching. Let's email by Twitter or via the link on my profile.

Maybe I could convince Mark to help out - if we add the ages of the two of you together you may be just a little older than me - you youngsters that know way more about trading than me!

I herd about hedge funds that use systems that actually read the news. A computer reads the news from Bloomberg or Reuters right after they were posted and would rate that "piece of information" through key words. Then the computer would buy/sell (or do nothing) the stock according to the its rating.The idea here was that the computer would be able to read the article/news/event much faster than a person, and thus enter his (it's =P) order much faster. One of the things they discovered or were amazed was that the response speed to those news was much slower than they would have thought.

I guess it is just a matter of time before some other hedge funds adopt similar strategies ...

Some of the old shcool guys must be going: "Ahhh... the good old times when we would phone-in our orders and read the quotes in WSJ or FT"